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Is the Great Moderation Ending? UK and US Evidence

Giorgio Canarella, WenShwo Fang, Stephen Miller () and Stephen Pollard
Additional contact information
WenShwo Fang: Feng Chia University
Stephen Pollard: Department of Economics, California State University, Los Angeles

No 801, Working Papers from University of Nevada, Las Vegas , Department of Economics

Abstract: The Great Moderation, the significant decline in the variability of economic activity, provides a most remarkable feature of the macroeconomic landscape in the last twenty years. A number of papers document the beginning of the Great Moderation in the US and the UK. In this paper, we use the Markov regime-switching models of Hamilton (1989) and Hamilton and Susmel (1994) to document the end of the Great Moderation. The Great Moderation in the US and the UK begin at different point in time. The explanations for the Great Moderation fall into generally three different categories: good monetary policy, improved inventory management, or good luck. Summers (2005) argues that a combination of good monetary policy and better inventory management led to the Great Moderation. The end of the Great Moderation, however, occurs at approximately the same time in both the US and the UK. It seems unlikely that good monetary policy would turn into bad policy or that better inventory management would turn into worse management. Rather, the likely explanation comes from bad luck. Two likely culprits exist: energy-price and housing-price shocks.

Keywords: Great Moderation; Regime switching; SWARCH (search for similar items in EconPapers)
JEL-codes: C32 E32 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2008-11
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Published in Modern Economy, May 2010

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